Menu Close

American Home Assurance Company, National Union Fire Insurance Company of Pittsburgh, PA and Illinois National Insurance Company issued workers’ compensation policies to Optima Staffing, Inc. for 2008 and 2009 based in part on Optima’s representation it was a temporary staffing agency that directly hired, trained and supervised employees deployed as temporary workers in various industries and not a professional employer organization, which provided administrative services and procured workers’ compensation insurance on behalf of client employers for employees that Optima did not directly hire, train or supervise.

After defending and indemnifying 175 workers’ compensation claims, the Insurers discovered Optima was operating as a professional employer organization for several temporary staffing agencies and their special employer clients.

The Insurers rescinded the policies and filed this action for declaratory relief to confirm the rescission and for restitution from the temporary staffing agencies and the special employers.

The Insurers appeal from the judgments entered after the trial court sustained without leave to amend the demurrers of several of the temporary staffing agencies and special employers and subsequently granted motions for judgment on the pleadings in favor of the remaining temporary staffing agencies and special employers.

The Court of Appeal reversed the judgments and the orders dismissing the causes of action for declaratory relief and unjust enrichment. in the unpublished case of American Home Assurance Co. v. 99 Cents Only Stores and the matter remanded.

An insurer may rescind an insurance contract when the insured has misrepresented or concealed material information, even unintentionally, in obtaining insurance coverage. When an insurance policy is rescinded, “it is void ab initio, as if it never existed.” Rescission effectively renders the policy totally unenforceable from the outset so that there was never any coverage and no benefits are payable. Rescission applies to all insureds under the contract, including additional insureds, unless the contract provides otherwise.

Defendants contend the Insurers’ rescission claim fails because, by declaring they do not intend to seek reimbursement from the injured workers or to terminate previously agreed-upon benefits, the Insurers are not truly seeking rescission. In response, the Court of Appeal noted “It would be a perversion of equitable principles to prevent an aggrieved party from seeking relief because it did not want to pursue damages or seek restitution from individuals who are least likely to have the resources to mount a defense. ”